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The Great Reversal: How America Gave Up On Free Markets by Thomas Philippon

Why do Americans pay more than Europeans or Asians for cellphone service that isn’t even as good as theirs? That’s a question Thomas Philippon, a professor of finance at New York University and an adviser to the Federal Reserve Bank of New York, asked himself one day. He attempts to answer the question in this book. His answers aren’t encouraging.

Philippon says he will offer three main arguments:

One: Competition has declined in most sectors of the US economy. Measuring competition is easier said than done, for we can find only imperfect proxies. We will look at prices, profit rates, and market shares. None is perfect, but together they can form a convincing picture.

Two: The lack of competition is explained largely by policy choices, influenced by lobbying and campaign fiance contributions. We will look at the dollars spent by every US corporation over the past twenty years to lobby their regulators, their senators, their congressmen, and members of key committees, as well as to finance federal and state elections. We will show how these efforts distort free markets: … corporate lobbying and campaign finance contributions lead to barriers to entry and regulations that protect large incumbents, weaker antitrust enforcement, and weaker growth of small and medium-sized firms.

Three: The consequences of a lack of competition are lower wages, lower investment, lower productivity, lower growth, and more inequality. We will examine how the decline in competition across industries has effects that reach into the wallets and bank accounts of everyday Americans. We will also demonstrate why lower competition leads to less of the sort of thing that we traditionally associate with growing economies: investment, technological advancement, and rising wages [9].

The author explains that economists look at three main variables “to assess the degree of competition in an industry”:

…the degree of concentration (that is, whether there are lots of small firms or whether the industry is dominated by a few large firms); the profits that these firms are making, and the prices that customers pay….The bad kind [of concentration] occurs when incumbents in an industry are allowed to block the entry of competitors, to collude, or to merge for the primary purpose of increasing their power over market-wide pricing…[25].

In most US industries, market shares have become more concentrated and more persistent. Industry leaders are less likely to be challenged and replaced than they were twenty years ago. At the same tine, their profit margins have increased [60].

The Great Reversal is filled with data and references to journal articles, but the material is presented in digestible form (the more technical explanations are marked off from the main text). One result of all the data and all the related concepts is that the book is a kind of introduction to economics. I came away with a much better understanding of the work economists do when they look for patterns in all the buying and selling a society does.

I also came away convinced that things will only get worse — there will be less competition and more inequality — unless we reform our political culture. I already knew that American political campaigns are incredibly expensive compared to campaigns in Europe. But on average 50 times as expensive? I didn’t realize that the European Union now does a better job insuring competition than we do. As Sen. Elizabeth Warren emphasizes, we need big, structural change if we’re going to increase competition, reduce inequality and deal with the major challenge of global warming.

The book’s title, The Great Reversal, refers to the fact that the US economy used to work better for society as a whole. The data shows that it was mainly in the last twenty years that competition seriously declined. Can the reversal be reversed in the next twenty?

However, after spending “hundreds of hours researching and writing this book”, the author was surprised to realize “how fragile free markets really are”:

We take them for granted, but history demonstrates that they are more the exception than the rule. Free markets are supposed to discipline private companies, but today, many private companies have grown so dominant that the can get away with bad service, high prices, and deficient privacy safeguards. Only two decades ago, the United States was effectively the land of free markets and a leader in … antitrust policy. If America wants to lead once more in this realm, it must remember its own history and relearn the lessons it successfully taught the rest of the world [287-288].